John P. Napolitano: Opening your own business -- Minimize the risk with careful planning

Monday

Sep 24, 2007 at 12:01 AMSep 24, 2007 at 3:15 AM

Maybe you've recently gone through a layoff and want more control over your future. Perhaps you're tired of being retired and want to put your business savvy back to good use. Or it could be that now is the perfect time to take that idea that has been percolating in the back of your mind to the forefront. For whatever reasons, you've decided to take the plunge and open your own business.

John P. Napolitano

Maybe you've recently gone through a layoff and want more control over your future. Perhaps you're tired of being retired and want to put your business savvy back to good use. Or it could be that now is the perfect time to take that idea that has been percolating in the back of your mind to the forefront. For whatever reasons, you've decided to take the plunge and open your own business.

Opening a business, regardless of how fabulous the product or service, is not an endeavor without risk. You may have completed market research and performed all other necessary due diligence but the fact remains - you won't be reeling in the cash during the first months or maybe even years of your start-up venture. So take an honest and thorough review of your personal banking accounts and other liquid assets before purchasing expensive equipment or signing a lease. You need to have enough personal savings to get through the early stages of business ownership - and you may have to alter your lifestyle somewhat to avoid going into heavy debt.

Chances are you will require lines of credit at some point and the time to get them lined up is before you need them. If you have significant equity in your home, look into a home equity line of credit that will allow you to borrow at around the prime rate. Having equity lines in place prior to opening your business will also cut down on paperwork. The amount of documentation required to get a line of credit increases for self-employed individuals.

If you're still on someone else's payroll that offers health insurance and is subject to Consolidated Omnibus Budget Reconciliation Act (COBRA), you can probably keep your coverage for up to 18 months by paying full premiums on your policy, in addition to a charge for administrative costs. You may be able to find a more cost-effective plan in fairly short time, but you'll feel better knowing you're covered in the interim.

There's another line to add to that list - disability insurance. Unlike health insurance, disability coverage ends the minute you leave a job (or a job leaves you). To avoid potential headaches, get your own disability insurance policy in place before you open those business doors.

Most new businesses fail because of a lack of proper capitalization. Are you prepared to go into debt to accommodate your entrepreneurial spirit? Most fledgling business owners curtail initial costs by deferring their own salary. Can your household support that cut in income and for how long? Of course, loans are out there for the asking, but business owners are often asked to personally guarantee a loan. If your business venture doesn't pan out, then that debt will still be yours to pay.

The Patriot Ledger

John P. Napolitano is the CEO of U.S. Wealth Management in Braintree. Do you have a financial issue you want him to answer? E-mail him at biznews@ledger.com or write him at ''Making Cents,'' c/o Business Department, The Patriot Ledger, 400 Crown Colony Drive, Quincy, MA 02269-9159.